Calculating Financial Values

Demonstrate your understanding of financial concepts by completing the following problems. Where appropriate, show or explain your work. It is recommended that you use Excel and its built-in formulas to work on the problems.Problem 1. Calculate the future value of $3,500, compounded annually for each of the following:10 years at 7 percent.15 years at 9 percent.20 years at 5 percent.Problem 2. Calculate the present value for each of the following:Problem 2. Calculating Present ValuesPresent ValueYearsInterest RateFuture Value 54%$15,250 87%$30,550 1210%$850,400 2015%$525,125Problem 3. Calculate the interest rate for each of the following:Problem 3. Calculating Interest RatesPresent ValueYearsInterest RateFuture Value$2822 $325$6076 $891$32,60012 $142,385$57,43522 $463,200Problem 4. Calculate the number of years in each of the following:Problem 4. Calculating the Number of PeriodsPresent ValueYearsInterest RateFuture Value$765 6%$1,385$845 9%$4,752$17,200 11%$432,664$23,700 14%$182,529Problem 5. Refer to the cash flows listed for the Kelly Company investment projects in the table below. The discount rate is 6 percent. Calculate the present value of these cash flows as well as the present value at 12 percent and at 17 percent.Problem 5. Present Value and Multiple Cash FlowsYearCash Flow1$7502$8403$1,2304$1,470Problem 6. Value the bond Midcorp has issued, with the following characteristics:Par: $1,000.Time to maturity: 28 years.Coupon rate: 7.50 percent.Semiannual payments.Calculate the price of this bond if the yield to maturity (YTM) is each of the following:7.50 percent.9 percent.4 percent.Problem 7. Calculate the bond yield in the following scenario: Two years ago, Walters Electronics Corporation issued 20-year bonds at a coupon rate of 6.75 percent. The bonds make semiannual payments, and currently sell for 106 percent of par value. Calculate the YTM.Problem 8. Calculate the stock value in the following scenario: The next dividend payment by RST Incorporated will be $3.45 per share. The dividends are projected to sustain a 6.50 percent growth rate into the future. If RST stock currently sells for $67 per share, what is the required return?Problem 9. Calculate the stock value in the following scenario: Nickels Corporation will pay a $3.10 per share dividend next year. The company plans to increase its dividend by 4.25 percent per year, indefinitely. How much will you pay for the company’s stock today if you require a 12 percent return on your investment?Problem 10. Provide a three-column table identifying four key characteristics of stocks (equity) and bonds (debt) and comparing them. Briefly discuss why a firm would prefer one over the other as a method of financing.
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Complete a series of 10 problems in which you calculate the time value of money,
the price of a bond and yield to maturity, and the stock price and required return as
well as compare characteristics of stocks and bonds.
Note: The assessments in this course build upon each other, so you are strongly
encouraged to complete them in sequence.
Compounding and discounting cash flows might be the most important topic in the
study of finance. The practice of discounting cash flows applies to everything from
mortgage, auto, and student loan calculations to valuing bond and stock prices and
deciding which projects an organization should invest in to create value for its
shareholders.
By successfully completing this assessment, you will demonstrate your proficiency
in the following course competencies and assessment objectives:
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Competency 1: Apply the theories, models, and practices of finance to the financial
management of the firm.
Calculate time value of money problems, including future value, present value,
interest rate, number of periods, and net present value (NPV).
Calculate the price of a bond and the yield to maturity (YTM).
Calculate the stock price and required return of a stock.
Competency 3: Evaluate alternative methods of financing a firm in diverse economic
environments.
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Compare four key characteristics of stocks and bonds.
Questions to Consider
To deepen your understanding, you are encouraged to consider the questions below
and discuss them with a fellow learner, a work associate, an interested friend, or a
member of the business community.
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What is the importance of time value of money concepts, including compounding
(future value), discounting (present value), and annuities? Why do organizational
leaders need to understand these concepts?
What type of bond interests you? How is it different from other bonds?
How are bonds valued? How do interest rates affect the value of bonds? Consider
the importance of the yield to maturity (YTM).
Resources
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Suggested Resources
The resources provided here are optional. You may use other resources of your
choice to prepare for this assessment; however, you will need to ensure that they
are appropriate, credible, and valid. They provide helpful information about the
topics in this unit. The MBA-FP6016 – Finance and Value Creation Library Guide can
help direct your research. The Supplemental Resources and Research Resources,
both linked from the left navigation menu in your courseroom, provide additional
resources to help support you.
The following resources will provide assistance to complete the assessment.
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Assessment Problems – Helpful Tips [DOCX].
Excel Examples [XLS].
The following texts are designed to assist learners to master core concepts, solve
financial problems, and analyze results.
Boundless. (n.d.). Boundless finance. Retrieved from
https://www.boundless.com/finance/textbooks/boundless-finance-textbook/
Chapter 5, “Time Value Money”.
Chapter 6, “Bond Valuation”
Chapter 7, “Stock Valuation”.
Chapter 15, “Dividends”.
Additional Resources for Further Exploration
The following texts are designed to assist learners to master core concepts, solve
financial problems, and analyze results.
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Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2014). Corporate finance:
Core principles and applications (4th ed.). New York, NY: McGraw-Hill. – Available
from the bookstore
Chapter 4, “Discounted Cash Flow Valuation,” pages 82–128.
Chapter 5, “Interest Rates and Bond Valuation,” pages 129–163.
Chapter 6, “Stock Valuation,” pages 164–194.
The text offers an introductory look at corporate finance.
Welch, I. (207). Corporate finance (4th ed.). Retrieved from http://book.ivowelch.info/read/.
Chapter 3, “Stock and Bond Valuation: Annuities and Perpetuities,” pages 37-53.
Chapter 5, “Time-Varying Rates of Return and the Yield Curve,” pages 75-103.
Chapter 15, “Valuation from Comparables and Financial Ratios,” pages 387-421.
Assessment Instructions
Demonstrate your understanding of financial concepts by completing the following
problems. Where appropriate, show or explain your work. It is recommended that
you use Excel and its built-in formulas to work on the problems.
•
•
•
Problem 1. Calculate the future value of $3,500, compounded annually for each of
the following:
10 years at 7 percent.
15 years at 9 percent.
20 years at 5 percent.
Problem 2. Calculate the present value for each of the following:
Problem 2. Calculating Present Values
Present Value
Years
Interest Rate
Future Value
5
4%
$15,250
8
7%
$30,550
12
10%
$850,400
20
15%
$525,125
Problem 3. Calculate the interest rate for each of the following:
Problem 3. Calculating Interest Rates
Present Value
Years
Interest Rate
Future Value
$282
2
$325
$607
6
$891
$32,600
12
$142,385
Problem 3. Calculating Interest Rates
Present Value
Years
$57,435
22
Interest Rate
Future Value
$463,200
Problem 4. Calculate the number of years in each of the following:
Problem 4. Calculating the Number of Periods
Present Value
Years
Interest Rate
Future Value
$765
6%
$1,385
$845
9%
$4,752
$17,200
11%
$432,664
$23,700
14%
$182,529
Problem 5. Refer to the cash flows listed for the Kelly Company investment projects
in the table below. The discount rate is 6 percent. Calculate the present value of
these cash flows as well as the present value at 12 percent and at 17 percent.
Problem 5. Present Value and Multiple Cash Flows
Year
Cash Flow
1
$750
Problem 5. Present Value and Multiple Cash Flows
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Year
Cash Flow
2
$840
3
$1,230
4
$1,470
Problem 6. Value the bond Midcorp has issued, with the following characteristics:
Par: $1,000.
Time to maturity: 28 years.
Coupon rate: 7.50 percent.
Semiannual payments.
Calculate the price of this bond if the yield to maturity (YTM) is each of the
following:
7.50 percent.
9 percent.
4 percent.
Problem 7. Calculate the bond yield in the following scenario: Two years ago,
Walters Electronics Corporation issued 20-year bonds at a coupon rate of 6.75
percent. The bonds make semiannual payments, and currently sell for 106 percent
of par value. Calculate the YTM.
Problem 8. Calculate the stock value in the following scenario: The next dividend
payment by RST Incorporated will be $3.45 per share. The dividends are projected
to sustain a 6.50 percent growth rate into the future. If RST stock currently sells for
$67 per share, what is the required return?
Problem 9. Calculate the stock value in the following scenario: Nickels Corporation
will pay a $3.10 per share dividend next year. The company plans to increase its
dividend by 4.25 percent per year, indefinitely. How much will you pay for the
company’s stock today if you require a 12 percent return on your investment?
Problem 10. Provide a three-column table identifying four key characteristics of
stocks (equity) and bonds (debt) and comparing them. Briefly discuss why a firm
would prefer one over the other as a method of financing.

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